Every year, thousands of UK pensioners retire to Spain's sunny Costa's to enjoy the warm year-round sunshine and the relaxing, carefree lifestyle that it offers.
And why not?
It's a well-known fact that living in the sun is better for our physical and mental health. The healing benefits of the sun, not to mention the Mediterranean diet have been well documented.
If you want to live to a ripe old age, retiring to Spain is a great choice. In a recent publication by the World Health Organisation, Spanish women had the second-highest life expectancy in the world. No wonder so many expats are coming to Spain.
Unfortunately, though, we can't live on sunshine alone can we? We all need a steady income to pay the bills and keep us in the lifestyle that we are used to.
If you are a pensioner, your main source of income will be your state or private pension and if you are retiring here to Spain, it's important that you understand the process of claiming your pension.
So, read on and find out about the financial implications of living in Spain, specifically, how it may affect your pension entitlements, your retirement income as a whole and who to contact about applying for your pension.
There are two main scenarios when thinking about where you will obtain your pension and how and where it will be taxed. These are:
Scenario #1 - You Previously Lived in UK and Have Never Worked in Spain
If you previously lived in the UK and are entitled to a state pension, you will need to contact the UK IPC (International Pension Centre) in order to have your pension paid directly to your bank account in Spain.
If you decide to move to Spain permanently you must inform the IPC office that pays your pension benefits before you leave to avoid any problems or delays in receiving payment.
You will also need to complete the International Pensions Direct Payment Form which can be obtained at https://www.gov.uk/government/publications/guidance-on-claiming-a-state-pension-if-you-retire-abroad
You may also need to obtain a Certificado de Residencia Fiscal NEN - España Convenio from your local tax office in Spain as proof that you are now resident in Spain and are, therefore, registered to pay taxes in Spain.
That way, your UK pension payment will only be taxed in Spain and not in the UK.
There are a number of different ways in which you can receive a pension from abroad while you are living in Spain. In many cases, it is paid directly into a bank account here in Spain, but can be paid into a UK bank account if required.
If paid into a Spanish account, the transfer will be converted from Sterling into Euros.
You have the choice of having your payments made every four or 13 weeks.
Please note that even if you move to Spain permanently, there are still a number of UK benefits that you may still be entitled too such as Personal Independence Payment and Bereavement Benefits. You can visit the following page which tells you which you are entitled too https://www.healthplanspain.com/blog/expat-tips/353-what-uk-benefits-are-expat-pensioners-entitled-to-in-spain.html
Unfortunately, if you currently receive UK pension credit, this is not payable when living permanently abroad.
Contacting the IPC in the UK
If you are in any doubt about the procedure or have any unanswered questions, it is important that you contact the IPC as soon as possible at:
International Pension Centre
The Pension Service 11
Mail Handling Site A
Telephone: +44 (0)191 218 7777
Textphone: +44 (0)191 218 7280
Monday to Friday, 8 am to 6 pm
Scenario #2 - You Have Worked Any Amount of Time in Spain
If you have spent any amount of time working in Spain and paying tax prior to your retirement, the procedure for you changes slightly.
In such a case, you will need to apply for your UK pension via the Instituto Nacional de la Seguridad Social (INSS) in Spain.
The INSS office is responsible for processing your claim and bringing together records of your contributions from any other countries you may have worked in, including the UK.
Contacting the INSS in Spain
The following page is in English and provides information on the process of applying for your UK pension when living in Spain.
Forms can usually be submitted online, or sent to your local Social Security Office. You may also deliver them there in person if you wish.
To find your local INSS office, please visit the following page and use the interactive map for your region.
If having to deal with Spanish paperwork worries you at all or you are not up to speed with the language, it may be advisable to hire a Spanish Gestor to help guide you through the process.
You can view our other article on UK and Spanish pensions including current contribution and age requirements here
Taxation of Pensions and Tax Thresholds
Taxation: UK or Spain?
Britain has a double taxation agreement (DTA) with Spain and other EEA countries to ensure people do not pay tax on the same income in both countries.
There is currently a treaty in place between the two countries which means that if you live in Spain, but receive a pension from the UK, it will be taxed in Spain. It is your responsibility though, to inform the pensions department in the UK that this is the case so that your pension can be sent with no deductions. It is also your responsibility to declare any pension payments to the tax office in Spain, so that it can be assessed for tax purposes.
You may also need to get a Certificado de Residencia Fiscal NEN - España Convenio from your local tax office as proof that you are now resident in Spain and obliged to pay your taxes here.
Please note that if you will be in receipt of a Government pension, these are not taxable in Spain and are only taxed in the UK. For a full list of pensions categorised as Government and non-Government, please see the following page https://www.gov.uk/hmrc-internal-manuals/international-manual/intm343040
If the Government pension is transferred at any point to a private pension scheme, it is then taxed in Spain as a regular pension.
State and occupational pension income is treated as general income in Spain meaning that is grouped with other forms of income as a part of your overall income for tax purposes.
Pension income does receive a deduction of €2,000 compared to the previous allowances of between €2,652 and €4,080, depending on the size of your income.
Those on a low net income of less than €14,450 (with no more than €6,500 derived from investments) also receive a pro-rata allowance of between €0 and €3,700.
Your overall income is then taxed at the progressive scale rates of between 19% for incomes up to €12,450 and 47% for incomes of €300,000 and above.
As in the UK and other countries, there are personal tax allowances which for 2022 are:
Under 65 years - €5,500
65+ - €6,700
75+ - €8,100
Please see our How to File an Income Tax Return in Spain for current tax rates.
Declaring Foreign Assets
In accordance with Spanish and international law, all residents in Spain must declare assets or groups of assets held outside of Spain. Assets may include bank accounts, investments, insurance, annuities and property etc.
Every year on the 31st of March nationals and non-nationals alike must file an annual declaration of assets held overseas.
Severe penalties for incorrect, incomplete or late reporting can be incurred and the legislation also means that criminal charges can be brought in the case of non-compliance.
The annual overseas asset declaration is a separate exercise to the annual tax return requirement.
Pension Lump Sums
Although pension lump sums are tax-free in the UK, this is not the case in Spain.
If you wish to avoid paying tax on the lump sum, it would be advisable to try to take the lump sum before moving to Spain.
You also have the option not to take the lump sum and instead commute it into your pension pot and receive an increased pension payment.
In some cases, it may be more tax-efficient to pay the tax on the lump sum payment as you may potentially live for another 20 years or more in which case your extra monthly pension payments would be taxed.
If in doubt, seek professional financial advice from a tax expert here in Spain.
Purchased annuities are taxed favourably in Spain with allowances of up to 92% tax-free on whole-life annuities if taken over the age of 70.
As annuities are classed as savings income, the income from them is taxed at a fixed rate of around 18%.
Temporary annuities have a tax-free allowance of between 75% and 88%.
Annuities are a bit of a grey area in Spain and as such, there are no guarantees that the above tax allowances will be applied. Allowances can vary between regions and in some cases in the same region.
Exchange Rates and How They Can Affect Your Pension Income
Remember that although your pension will be paid in Sterling, when it is paid into a Spanish bank account it will be converted into Euros. This means that the money that you receive each month will fluctuate.
If Sterling weakens considerably against the Euro in the currency markets, your pension will in effect be converted into fewer Euros reducing the amount that you receive. Conversely, if Sterling strengthens in the markets, you will receive more Euros.
It is possible is some cases to move your pension pot out of the UK and into a QROPS, but specialist advice must be sought first as it can be a very complicated process.
Another option is to speak with a currency exchange specialist in Spain as it is sometimes possible to get a fixed rate for up to 24 months, avoiding currency exchange fluctuation and bank transfer charges in the process.
Private Health Insurance for Expats
If you want the security of knowing that you and your loved ones are covered against any unforeseen health issues in Spain, please consider one of our excellent value, low-cost Sanitas health insurance policies. All of our policies are in English and are underwritten by Bupa.
You can view our range of policies here - http://www.healthplanspain.com/sanitas/sanitas-health-plans.html
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